Signs of a Broader Emerging Market Crisis, and a Market Top?
I loved the title of an article in the Boston Globe yesterday: “How Can You Tell There’s a Recession Coming? No One Sees It.”
I warned on July 16 that the dollar was trading in a potential reverse head-and-shoulder pattern that would project up towards $103 if it broke above $96.
The dollar exceeded that mark last week with the Turkish lira crash and crisis over Trump warning about doubling tariffs on a country that has now seen a 40% slide in its currency and stock market this year.
Its 10-year sovereign bonds have spiked to near 20%. That’s what happens when markets get concerned over your debt and currency… a stern warning to Greece and Italy ahead!
Such a rise would mark about 7% and would impact gold and commodities prices.
If gold went down another 7% in response after already being hammered and very oversold, it could approach its past lows in December 2016 around $1,127.
Silver could be down more like 10% and retest its lows back to December 2015 around $13.00, when gold bottomed in its first major crash near $1,050.
I also warned on July 2 that emerging markets are diverging from the U.S. down near 20% and China down 23% this year.
This Turkish crisis looks like the poster boy for this emerging market debt crisis.
Most of the $60 trillion in added global debt since the 2008 crash has come in emerging countries and they borrow mostly in U.S. dollars and pay U.S. interest rates.
Both are rising and causing problems. Turkey is just the biggest and most recent example with the added threat of double tariffs from Trump over the demand to release Andrew Brunson, a U.S. evangelical pastor.
How many threats to the global economy with his trade wars does Trump think it can handle?
Southern European banks have the most exposure to Turkish debt. So the euro has an opposite head-and-shoulders pattern that projects a greater fall of about 10% to around $1.04, it’s major low in early 2017.
In the crisis ahead, I expect the dollar to rise to around 120+ and the euro to fall to around 85 cents on the dollar before potentially bottoming.
A vacation in Europe will definitely look more attractive after that happens!
A rising dollar is not good for our exports or for the world economy, especially China and emerging countries. It will help keep inflation lower here and help our consumers a bit in purchasing power from imports.
Is a debt crisis in emerging markets the next stealth subprime debt crisis emerging?
Is a top in the U.S. and global markets being set up now, despite classic technical indicators suggesting “no problem?”
Will gold keep falling despite being very oversold for now, and other commodity prices?
Or will there be a short-term resolution on the trade wars, and a new Trump tax cut for capital gains that adjusts for inflation…
And stocks continue their blind-folded rise into 2019 before the greatest top since 1929 on a very powerful 90-year “Great Reset” cycle?
If that occurs, it should be the last hurrah for this massively over-bloated “market on crack.”
The next few months will be critical for these issues. A surprise crash much below $20,000 on the Dow would favor a top in late 2018.
A more normal crash back to the lows around $23,400 on the Dow — or less — by early November, or at the latest February, would favor a continued rally into September or October of 2019.
Since most fundamental and technical indicators don’t work so well in this totally artificial economy and rally, these market patterns — which are still more reliable — will be a big topic at our Irrational Economic Summit in Austin on October 25 – 27.